What is cash-on-cash return?
Skip the mathCash-on-cash return calculatorCash-on-cash return tells you what your own money earns each year from a rental. It answers a plain question: for every dollar I put in, how many cents come back in cash this year?
The formula
Cash-on-cash return = Yearly pre-tax cash flow / Total cash invested
- Yearly pre-tax cash flow = rent collected - operating expenses - mortgage payments. In other words, net operating income minus the loan.
- Total cash invested = down payment + closing costs + repairs, furnishing or anything else you paid to get the property rented.
Worked example
| Line | Amount |
|---|---|
| Purchase price | $300,000 |
| Down payment, 25 % | $75,000 |
| Closing costs | $9,000 |
| Repairs before the first tenant | $5,000 |
| Total cash invested | $89,000 |
| Net operating income | $19,000 |
| Mortgage payments ($225,000 at 7 %, 30 years) | -$17,963 |
| Yearly cash flow | $1,037 |
Cash-on-cash return = $1,037 / $89,000 = 1.2 %.
That is low even though the house has a cap rate above 6 %: the loan at 7 % costs more than the property yields, so borrowing pulls the return down. Put 40 % down in the calculator and the return goes up rather than down, the opposite of what most people expect.
What is a good cash-on-cash return?
Many investors aim for roughly 6 % to 10 % on long-term rentals, but no number is right for everyone. Compare it with:
- What a safe option such as a savings account or Treasury bills pays today, with no tenants and no repairs.
- The work involved: a self-managed rental is a part-time job.
- The rest of the return: loan principal paid down and appreciation are real, but you only collect them when you sell or refinance.
What it leaves out
Cash-on-cash is a year-one, pre-tax, cash-only measure. It does not count:
- Principal paydown. Part of each mortgage payment builds equity.
- Appreciation. The property may be worth more later, or less.
- Taxes. Depreciation often shelters much of the cash flow from income tax.
Use it as a quick check of whether a deal pays its way today, alongside the cap rate and the full rental property calculator.
Questions
What is the formula for cash-on-cash return?
Yearly pre-tax cash flow divided by total cash invested, times 100. Cash flow is NOI minus the mortgage payments; cash invested is the down payment, closing costs and repairs paid at the start.
How is cash-on-cash different from cap rate?
Cap rate is NOI divided by the price and ignores the loan. Cash-on-cash is cash flow after the loan divided by your own cash. A deal can have a fair cap rate and a poor cash-on-cash return when the loan is expensive.
Can cash-on-cash return be negative?
Yes, when the mortgage and costs are higher than the rent you collect. You then add money every month and rely on appreciation and loan paydown to come out ahead.